NCF(A) NCF(B) NCF(C) Initial investment $600,000 $800,000 $470,000 Planning horizon 10 years 10 years 10 years Salvage values Annual receipts $70,000 $130,000 $65,000 $400,000 $600,000 $260,000 Annual disbursements $130,000 $270,000 $70,000

NCF(A) NCF(B) NCF(C) Initial investment $600,000 $800,000 $470,000 Planning horizon 10 years 10 years 10 years Salvage values Annual receipts $70,000 $130,000 $65,000 $400,000 $600,000 $260,000 Annual disbursements $130,000 $270,000 $70,000

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter10: Property, Plant And Equipment: Acquisition And Subsequent Investments

Section: Chapter Questions

Problem 9P

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

Chingos and Daughters Construction is considering three investment proposals: A, B, and C. Proposals A and B are mutually exclusive, and Proposal C is contingent on proposal B. The cash flow data for the investments over a 10-year planning horizon are given below. The company has a budget limit of $1 million for investments of the type being considered currently. MARR = 15%. Determine which alternative should be selected using the external rate of return method.

NCF(A) NCF(B) NCF(C)
Initial investment
$600,000 $800,000 $470,000
Planning horizon
10 years 10 years 10 years
Salvage values
Annual receipts
$70,000 $130,000 $65,000
$400,000 $600,000 $260,000
Annual disbursements $130,000 $270,000 $70,000

Definition Definition Percentage gain or loss from a specific investment over time. The rate of return is the difference between the closing and initial values of an investment divided by the initial value of the investment. The closing value includes any intermediate cash flows such as dividends or interest amounts.

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